RETAILING MEGA-MERGER : For Investors, Deal Is Both Gain and Loss : Securities: Federated will pay well above current stock price but far below Broadway’s peak in 1993.
Broadway Stores Inc. investors, whose shares were worth $2.875 each at Monday’s close, will end up with substantially more than that if the Federated Department Stores Inc. bid goes through.
But many buyers of Broadway stock in recent years will still take a loss on the deal, at least initially.
Broadway holders would swap each of their shares for 0.27 Federated shares. Based on Federated’s closing stock price of $29.50 on Monday on the New York Stock Exchange, that means the deal is worth $7.97 a share to Broadway investors.
So Broadway shares should leap today. The deal was announced after the market closed on Monday.
As with any stock-swap merger, the final value of the transaction to Broadway investors will depend on Federated’s stock price when the deal closes. Federated’s shares are currently trading just under their 1995 high, and have risen from $17.875 earlier this year.
At nearly $8 a share, the purchase price is well below Broadway stock’s peak of $17.50 in 1993, which followed the firm’s emergence from Chapter 11 bankruptcy proceedings in October, 1992.
But the price is above the $7.375 that the stock fetched at the start of 1995, and is sharply above the low of $1.50 reached just last week, as some of Broadway’s suppliers cut off shipments and Wall Street feared the company would again seek bankruptcy court protection.
Still, many buy-and-hold investors who have stuck with Broadway since it emerged from bankruptcy in 1992 will end up losers, based on the current value of Federated stock.
Among the apparent losers is Broadway’s controlling shareholder, Sam Zell. He currently holds 24.8 million shares, or 53.9% of the total outstanding.
Zell’s investment in Broadway, most of which was made via his purchase of the company’s unsecured debt during its period in bankruptcy, is estimated to total about $260 million.
He would get 6.69 million Federated shares worth $198 million at Monday’s closing price.
Also on the losing end: Investors who paid $13.75 a share when Broadway sold 11.45 million new shares in July, 1993, as it pursued Zell’s plan to rebuild its finances and re-energize its retail franchise.
For long-time Broadway shareholders--meaning those who were investors in the predecessor chain known as Carter Hawley Hale--the Federated takeover represents an end to a mostly painful investment saga.
A Carter Hawley Hale investor who owned 100 shares when the company filed for bankruptcy court protection in February, 1991, wound up with just 8.1 shares in the reorganized company, which later became Broadway Stores. So Carter Hawley owners effectively suffered a 92% loss of their equity.
Those 8.1 Broadway shares, worth $142 at their peak price, will now become 2.2 shares of Federated worth $65.
When Broadway emerged from bankruptcy, shareholders at the time also received 8.4 stock warrants for every 100 shares of the old Carter Hawley Hale.
But the warrants represented the right to buy Broadway stock at $17 a piece before October, 1999. With the Federated deal, the warrants are worthless. They closed at 22 cents each on the NYSE on Monday.
Meanwhile, Broadway employees who participate in the firm’s 401k retirement savings plan may lose. In addition to owning Broadway common stock, the plan held 60% of the preferred stock Broadway issued when it emerged from bankruptcy.
But that preferred stock did not trade, nor did it pay dividends. It was convertible into Broadway warrants, but those are now worthless.
Federated did not address the preferred stock in its takeover announcement, and Zell said he didn’t know what value the preferred stock would have in the deal, advising a reporter to call another Zell official today.
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What It Means
Federated Department Stores’ agreement Monday to buy Los Angeles-based Broadway Stores Inc. for $373 million rescues Broadway from a possible filing for bankruptcy protection. Here are some of the other ways the deal will affect various groups:
Consumers: The Broadway name--as well as that of Weinstocks and Emporium--will pass from the scene, but some of the stores will be converted to Macy’s, Bullock’s or Bloomingdale’s beginning early next year. Other Broadway stores will be sold or closed.
Shareholders: For each of their Broadway shares, stockholders will get about $8 worth of Federated stock. In a second Chapter 11 filing, these investors would have faced significant losses.
Creditors: By finding a financially solid buyer, Broadway will be better able to pay its suppliers, bondholders and others. This should mean that any interruption in the flow of merchandise to Broadway stores would be eased.
Jobs: Some layoffs are expected. However, both Federated and Broadway said it is too early to tell where or how many jobs would be lost.
Source: Federated Department Stores
